Investors on Wednesday welcomed Tuesday's assurance from the government that it would not let the market deteriorate and clarification from the central bank about its August 20 circular on a cap on certain investments, sending the benchmark Nepal Stock Exchange (Nepse) Index up 38.57 points.

Nepal Rastra Bank (NRB) had, on August 20, issued a directive that allowed bank and financial institutions (BFIs) to use cut down their exposure to risky investments and invest only up to 1 percent of their core capital in short-term trades.

The directive had spooked the market which dropped 37.61 points (3.82 percent) on Monday, a six-year record. It was the biggest drop seen since the Nepse Index fell 40.99 points to 1134.38 on August 31, 2008.

On Tuesday, Krishna Prasad Koirala, joint-secretary at the Ministry of Finance, tried to calm the market. He told a press conference that the government was watching the situation carefully and would not let the market deteriorate extensively. Koirala also urged small investors not to panic, accusing big investors of spreading the wrong interpretation of the NRB directive to take advantage from a sell-off.

NRB also clarified that the 1 percent cap was only on short-term investment -- classified as 'held-for-trading' and would not affect any other type of investment. It also said that the BFIs would still be allowed to invest 30 percent of their Tier-2 capital on shares and other long and medium-term investment tools.

The stock market fell a further 25.98 points on Tuesday.

However, investors warmed up to the government assurance and NRB clarification on Monday sending the Nepse Index rising to 960.43 points at the close of trading.